Publications & Events

UK Summer Budget 2015: Osborne's 'Big Summer Budget'—the key measures impacting business

The first fully Conservative Budget for 18 years, following the end of the Coalition as a result of the May general election, was anticipated to be a 'Big Budget' but in truth it was a mixed bag: the game changers are the proposed restrictions on the non-domicile basis of taxation and the continuing free fall of UK corporation tax rate (to reduce to 18% by 2020). As is routine nowadays, this budget continued to introduce further anti-avoidance measures aimed at real or perceived "aggressive" tax planning.

Our tax experts set out below their take on 7 key measures that will have a significant impact on businesses and wealthy individuals.


Restrictions on non-domicile status

Once Ed Miliband and the Labour party campaign raised the issue of the "remittance basis of taxation" in the lead up to the 2015 general election, this issue assumed centre stage of British political discourse and so it was inevitable that there would be some tightening of these rules, whichever party came to power.

It was originally feared that if the Labour party came to power and their stated position on the "remittance basis of taxation" was converted into implemented policy, the "remittance basis of taxation" would be altogether abolished at one stroke. The conservative Government's proposal is temperate in contrast. However, what has been proposed goes far wider than merely curtailing the availability of the "remittance basis" to those who have inherited their domicile (as was anticipated by some).

The proposed measures (announced to take effect from April 2017) will mean that non-domiciled persons whose "temporary stay" in the UK exceeds 15 years (in the preceding 20 years) will be taxed in a similar manner to UK domiciled persons if they continue to be resident in the UK. Furthermore, individuals who were born UK domiciled in the United Kingdom but have subsequently left the UK and become domiciled elsewhere, will no longer able to rely on their non-domicile status for tax purposes if they return to the UK and become resident in the UK.

These changes are a game changer any which way this is viewed. A long-standing century old principle of UK taxation is being substantially re-hauled and those affected by this change will have to either arrange their affairs suitably or reconsider their residency in the UK.

What is a positive though is that (a) the "remittance basis" has not been completely abolished with immediate effect, and (b) there is an elaborate technical note which confirms that these measures are not intended to have retrospective impact. Furthermore, it commits the government to publicly consult on this measure in the lead up to its introduction in 2017. It is predicted that the proposed measures will be diluted following public consultation leading up to its introduction.


Inheritance tax for enveloped properties

In a related change, the government will legislate to ensure that, from April 2017, inheritance tax is payable on all UK residential property owned by non-domiciles, regardless of their residence status for tax purposes, including property held indirectly through an offshore structure. A more detailed note setting out the scope of these proposals has been published alongside the Summer Budget, and a full detailed consultation will follow later this year.


Rate of corporation tax

In an unexpected but welcome move, the government has announced that the headline corporation tax rate will be reduced from 20% to 19% for the Financial Year beginning 1 April 2017. The corporation tax main rate will be reduced by a further 1% to 18% for the Financial Year beginning 1 April 2020. This appears to further the Government's mantra that "Britain is open for business".


Taxation of carried interest

Continuing on the theme of perceived anti-avoidance, the government will introduce legislation, effective from 8 July 2015 (and applying to arrangements entered into before that date), the aim of which is to ensure that sums which arise to investment fund managers by way of carried interest will be charged to the full rate of capital gains tax, with only limited deductions being permitted.

Individuals with carried interests are normally charged to capital gains tax on the full amounts they receive in respect of their carried interest, with deductions only allowed in respect of sums actually given by the individuals as consideration for acquiring the right to that carried interest.

The new measure is not intended to affect genuine investments in funds made by managers on an arm's length basis (known as "co-invest"). The aim is to ensure that individuals to whom a gain arises in the form of carried interest are taxed on their 'true, economic gain' and that planning tools designed to ensure they are taxed on a lower figure, to achieve a lower effective rate of tax, are not effective. In particular, the measure is designed to prevent tax being paid at less than the full rate due to the allocation of tax basis to individual fund managers from the application of the base cost shift rules or allocation of income and gain by a fund partnership.

We await the relevant legislation that will be introduced in Summer Finance Bill 2015.

The government will also launch a consultation to better understand the activities of collective investment schemes, to determine under what circumstances performance returns should be taxed as a capital gain.


Bank taxation

In a turn-around from the Spring Budget, which increased the UK bank levy from 0.156% to 0.21% from 1 April 2015, the Government has announced that they will reduce the full bank levy rate from (the previously introduced) 0.21% to 0.18% from 1 January 2016, 0.17% in 2017, 0.16% in 2018, 0.15% in 2019, 0.14% in 2020 and 0.10% in 2021. The levy will be replaced with an 8% surcharge on bank profits from 2016. The Government also announced that it will provide relief against the UK bank levy for payments made to the Eurozone Single Relief Resolution Fund from 1 January 2016.

This should be welcomed by the UK bank industry as, whilst the 8% surcharge at first sight would appear high, it has a direct link to the profitability of an institution, as compared with the bank levy which is a levy on the debts of the institution.


Combatting anti-avoidance

The UK's obsession with real or perceived tax avoidance continues. The UK government also continues to conflate altogether different concepts such as tax planning, tax avoidance and tax evasion, playing to the public mood. The Chancellor announced a number of measures aimed, he said, at making sure individuals and businesses 'pay what they owe' (a response surely to the popular perception that large businesses and wealthy individuals are not paying their fair share of tax – whatever that means). Measures will include:

(1) An extra £800 million investment between now and 2020 for HMRC's work on evasion and non-compliance;
(2) Tripling the number of criminal investigations HMRC can undertake into complex tax crime, concentrating on wealthy
individuals and companies, allowing HMRC to access more data to identify businesses that are not declaring or paying tax and clamping down on the organised crime gangs behind the illicit trade in tobacco and alcohol;
(3) Controlled Foreign Companies (CFC) loss relief restriction – the government will remove the ability for companies to use UK losses and reliefs against a CFC charge with effect from 8 July 2015; and
(4) Introducing a 'general anti-abuse rule' penalty and tough new measures for serial avoiders, including publishing the names of people who repeatedly use failed tax avoidance schemes.

Whilst investment in additional resources for HMRC is predictable, it remains to be seen if the continual addition of more targeted anti-avoidance measures will have the desired effect of increasing the tax take without increasing the uncertainty and complexity already inherent in the UK tax code.


Modernisation of the taxation of corporate debt and derivative contracts

The government announced it will introduce legislation to modernise the corporation tax rules governing the taxation of corporate debt 'loan relationships' and derivative contracts. The changes are wide-ranging, and include: clarifying the relationship between tax and accounting; basing taxable loan relationship profits on accounting profit and loss entries; a new 'corporate rescue' rule to provide tax relief where loans are released or modified in cases of debtor companies in financial distress; and new regime-wide anti-avoidance rules for both loan relationships and derivative contracts. The changes will generally take effect for accounting periods commencing on or after 1 January 2016.

Changes to make the rules more certain and easier to comply with are to be welcomed, but, as ever, the devil will be in the detail and we await the legislation that will be introduced in Summer Finance Bill 2015.


This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2015 White & Case LLP